Abbott Limited grants 500 share options to each of its 20 employees. Each grant is conditional on the employee working for the company for the next three years. The fair value of each option is estimated to be $6.00 at grant date and $8.00 at vesting date. The amount to be recognised as an expense by Abbott Limited in year 2 is:
A) $40 000.
B) $20 000.
C) $60 000.
D) $80 000.

Question

Quizplus · Accepted Answer

Each employee is granted 500 share options, so the total number of options granted is 20 x 500 = 10,000. The fair value of each option at grant date is $6.00, so the total value of the options granted is $6.00 x 10,000 = $60,000.

However, the options vest over three years, so the total expense to be recognised by Abbott Limited over the three-year period is $8.00 x 10,000 = $80,000.

In year 2, only one-third of the options will have vested (i.e. 10,000/3), so the expense to be recognised in year 2 is $80,000/3 = $26,666.67.

Therefore, the closest option to this amount is B) $20,000.

Abbott Limited Grants 500 Share Options to Each of Its